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Executive Summary

On 19 November 2018, the Central Bank of Ireland (the
"Central Bank") published a discussion paper entitled
"Outsourcing – Findings and Issues for Discussion"
(the "Discussion Paper") containing a summary of key
issues and risks identified by the Central Bank requiring prompt
attention by industry. The closing date for submission of responses
to questions posed in the Discussion Paper is 18 January 2019.

The findings in the Discussion Paper are underpinned by both the
Central Bank's supervisory engagements with industry along with
responses received from a recent cross-sectoral outsourcing survey
(completed by 18 banks, 82 asset management sector firms, 83
insurers and 2 payment institutions).

In its announcement of the publication of the Discussion Paper,
the Central Bank noted it has observed:

a significant increase in reliance on
outsourcing of activities (both on an intragroup and third party
basis) by regulated financial service providers;

serious deficiencies in board
awareness and understanding of the extent of reliance on
outsourcing; and

major weaknesses in relation to risk
management controls and processes, and business continuity planning
around outsourcing.

The Central Bank expects all regulated financial service
providers to review their current practices against the Discussion
Paper.

Format of the Discussion Paper

The Discussion Paper is split into two sections. Part A deals
with the Central Bank's minimum supervisory expectations around
the management of outsourcing risks and sets out the Central
Bank's findings in relation to current practices in the Irish
market, while highlighting particular weaknesses that should be
promptly addressed.

The Central Bank has noted that its focus on this area has been
borne out of increasing concerns in relation to outsourcing
practices and a recognition by the Central Bank of a widespread
failure of industry to implement governance, risk management and
business continuity practices to the standards expected by the
Central Bank.

Part B examines some of the keys risks and evolving trends
associated with outsourcing while also identifying ways firms might
mitigate these risks.

The Discussion Paper also provides a summary of the issues to be
addressed by regulated firms engaging in outsourcing while inviting
input and discussion from industry on these points.

The Central Bank has also noted that it will hold an outsourcing
industry conference in the first quarter of 2019 and that feedback
received on foot of the publication of the Discussion Paper will
"inform ongoing discussions around outsourcing trends, key
issues and the appropriate regulatory response" at this
conference.

Key Findings and Next Steps

The Discussion Paper contains a range of detailed and granular
findings, statistics and recommendations which should be closely
read by all regulated firms engaged in outsourcing.

In a statement accompanying the launch of the Discussion Paper,
the Central Bank's Director of Policy and Risk, Gerry Cross,
expressly confirmed that the Central Bank expects firms to analyse
the content of the Discussion Paper and address any issues relevant
to their outsourcing practices.

Importantly, Mr. Cross also stated that firms can expect Central
Bank supervisors to seek evidence of updates by firms to their risk
management frameworks demonstrating consideration of the Discussion
Paper and that any relevant findings have been implemented
accordingly.

We have of summarised at a high level in the table below the
Central Bank's findings in terms of both its current
supervisory expectations and the key risks and trends associated
with outsourcing.

The Discussion Paper also references Brexit noting that the
evolving landscape of migrating firms "is likely to involve a
substantial level of intragroup outsourcing as firms seeking to
become authorised in Ireland look to outsource to existing group
entities located in the UK", and notes that the unique risks
of this type of outsourcing should be expressly considered.

In addition, the Discussion Paper usefully contains a reference
list of applicable legislation/guidance regulated firms should also
consider when assessing their legal and regulatory obligations in
relation to outsourcing. The Central Bank also points to the
ongoing work of the European Supervisory Authorities in producing
outsourcing guidance, noting in particular that the EBA Draft
Outsourcing Guidelines 2018 are (though still in draft, and not
applicable to all sectors) a source of useful information.

Conclusion

Firms regulated by the Central Bank and engaging in outsourcing
practices should promptly carry out and document an exercise in
assessing whether their current outsourcing practices require
updating or enhancement in order to meet the standards of the
Central Bank as outlined in the Discussion Paper.

It is expected the Central Bank may prioritise inspections of
regulated firms' outsourcing practices in 2019 following
completion of this engagement with industry stakeholders. It is
also noteworthy that the Central Bank has previously imposed
substantial fines under its administrative sanctions procedure for
breaches of outsourcing and IT governance requirements.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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